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Cisco to Buy EMC? Don't Hold Your Breath

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There has been a rumor rustling around Silicon Valley for a number of months that Cisco Systems is on the verge of acquiring EMC. Such a move would make a lot of strategic sense for Cisco, but this rumored mega-merger of technology giants may have to wait for the U.S. economy to recover before becoming a reality.

If Cisco (s CSCO) were to acquire EMC (s EMC), it would have an enormous impact on the technology landscape and etch in granite the combined company’s role as the hub around which the rest of the enterprise data center industry revolves. It would also place the firm at the forefront of the ongoing synergy between storage and data networking, a trend observed back in July, when Brocade Communications Systems agreed to buy Foundry Networks for $3 billion dollars.

And it would give Cisco control over VMware, the leader in enterprise virtualization software, and help move it further up the technology stack from being a data networking vendor and into enterprise software. Last month at VMworld, Cisco announced the Nexus 1000V switch, an integration of their switching software with VMware ESX (this was not what I predicted, but it was a step  toward my prediction).

Such a deal could also help Cisco satisfy Wall Street by growing revenues, something that the company has done very successfully through other acquisitions, although not on this scale, in the past. This is where the economic crisis comes into play. Cisco had $26.2 billion in cash and cash equivalents as of its most recent financial quarter. EMC has a market capitalization of around $24 billion. Taking into account its current cash balances and outstanding debt, EMC’s enterprise value is around $22.4 billion. If Cisco wanted to pay a premium to EMC shareholders to purchase the company it would more than likely need to pay at least $25 billion or slightly less than its current total cash on hand. While Cisco is generating billions of free cash every quarter, spending all of its cash to acquire EMC would not be a prudent fiscal move.

If this rumored acquisition was considered strategic enough to the Cisco board of directors, one way to fiscally accomplish it without draining the cash reserves would be to raise debt. But given the current economic crisis, the debt vehicles that are available on the market are either non-existent or on very unattractive terms. So for now, it seems likely that Cisco will need to put its rumored acquisition on hold until the economic crisis gets resolved.

Allan Leinwand is a venture partner with Panorama Capital and founder of Vyatta. He was also the CTO of Digital Island.

9 Responses to “Cisco to Buy EMC? Don't Hold Your Breath”

  1. @Pebbles – Agreed, I keep hearing the rumors and had heard it was goign to happen this year. But, with the economic crisis, this has to be on hold for now, IMHO. Thanks for the links.

    @Tim – I agree and did not cover many of the angles of how this acquisition will change corporate IT globally – I suspect that will be covered in extensive detail when and if this deal occurs. I wanted to focus on how the economic crisis is affecting this rumored deal.

  2. Allan- Your article is perceptive but I wish you had stressed more on a key linkage here which is, with the onset of SaaS and Cloud Services in the Enterprise and SMB segments, Storage is in essence becoming a network function.

    Backup/restore/Disaster Recovery/Collaboration/ Email Archiving/ ….you need Network and Storage to go hand-in-hand.

  3. Pebbles

    This is a story as old as Cisco’s venture into the non-networking domain. Every year, there’s a rumor, and every year Cisco denies it. For example, the last couple of reports are:

    1. 2008
    2. 2007
    3. 2005

    Interestingly, EMC doesn’t deny these rumors.